At the stroke of midnight on December 31, 2025, nearly every American will experience significant tax changes as the major provisions of the Tax Cuts and Jobs Act of 2017 (TCJA) expire unless Congress extends them. Tax professionals warn that these changes will affect most people, impacting tax brackets, income tax rates, child tax credits, state and local tax deductions, mortgage interest deductions, and more.
Tax Rate Increases
Initiated by President Donald Trump, the TCJA lowered tax rates across the board and adjusted the thresholds for several income tax brackets. If these provisions sunset, tax rates will revert to their 2017 levels. For instance, a married couple with a taxable income of $250,000 will see their tax rate increase from 24% back to 33%. An individual making $39,000 will see their top tax rate rise from 12% to 25%. Those in the top tax bracket will see an increase from 37% to 39.6%.
Steps to Mitigate Higher Taxes
To mitigate the impact of higher taxes, Americans might consider accelerating income into 2024 and 2025. Retirees, for example, could withdraw more than their required minimum distributions during these years. Others may consider a Roth conversion to save money by paying the lower tax rates now and avoiding taxes when they withdraw from Roth accounts later. Additionally, deferring deductions like charitable contributions and retirement contributions could be beneficial if tax rates will be higher in 2026.
Return to Itemizing Deductions
The TCJA doubled the standard deduction, leading many to opt for it over itemizing. However, if this provision expires, the standard deduction will decrease, personal exemptions will return, and more people will need to itemize their taxes again. This means keeping receipts for charitable contributions and other deductible items to claim them.
Impact on Paychecks
Americans will feel the effects of higher tax rates and a lower standard deduction in their paychecks for the 2026 tax year. Withholding amounts are based on expected income and tax rates, and the lower standard deduction will result in higher tax withholding, potentially reducing take-home pay by $50 to $100 for some individuals.
Changes to the Child Tax Credit
The TCJA doubled the child tax credit to $2,000 per child under age 17, with a $1,700 refundable portion in 2024. If Congress does not act by the end of 2025, the child tax credit will revert to $1,000 per child, phased in starting at $3,000 of earned income. This change will significantly impact families relying on the current higher credit.
Work-Related Expense Deductions
Under the TCJA, W-2 employees could no longer deduct job-related expenses that were not reimbursed by their employers. If these provisions expire, W-2 workers will once again be able to deduct a wide range of unreimbursed work-related expenses, including mileage, home office supplies, and union dues.
Mortgage Interest Deduction
The TCJA limited the home mortgage interest deduction to the first $750,000 of indebtedness. If these provisions expire, the limit will increase to $1 million. Given the current high home prices and interest rates, this change could significantly benefit home buyers.
Moving Expense Deduction
The deduction for moving expenses will also return if the TCJA sunsets. This means individuals who relocate for work can deduct these costs from their taxes once again, which was not possible under the TCJA unless they were in the military.
Alternative Minimum Tax
The TCJA made changes that significantly reduced the number of people subject to the Alternative Minimum Tax (AMT). If these provisions expire, as many as 7 million people could be subject to the AMT, compared to just 200,000 under the TCJA. This change will primarily affect individuals making between $200,000 and $400,000.
State and Local Tax Deduction
The TCJA capped the state and local tax (SALT) deduction at $10,000. If the cap is removed, high-income individuals in high-tax states like California and New York will benefit significantly. Eliminating the cap could cost $197 billion over ten years, potentially widening the deficit and slowing economic growth.
Conclusion
As the expiration of the TCJA approaches, Americans need to be aware of the impending changes and consider steps to mitigate their impact. From higher tax rates to changes in deductions and credits, these adjustments will affect almost everyone. By planning ahead, individuals can better prepare for the “Super Bowl of tax law changes” coming in less than 18 months.